Fibonacci levels
What you learn in 3 minutesA reader wrote in to ask: why do so many charts show the same three lines, and do they mean anything on their own? This lesson shows what Fibonacci levels are, where the 38.2, 50 and 61.8 lines come from, and how to read them on a USD/ZAR chart around 18.4100. On a 0.10 lot position, one rand of movement in USD/ZAR is worth roughly R1,000, so the distance between these lines is not a small detail.
Three lines on a 4,100 point move
| Step | Amount | Note |
|---|---|---|
| Move size | 4,100 points | 18.4100 minus 18.0000, the low to the high of the completed move |
| 38.2 per cent line | 18.2534 | 18.4100 minus (4,100 x 0.382) = 18.4100 minus 1,566 points |
| 50 per cent line | 18.2050 | 18.4100 minus (4,100 x 0.50) = 18.4100 minus 2,050 points |
| 61.8 per cent line | 18.1566 | 18.4100 minus (4,100 x 0.618) = 18.4100 minus 2,534 points |
| Value of the 50 per cent line on 0.10 lots | R2,050 | 2,050 points x R1 per point on a 0.10 lot USD/ZAR position |
Brokers quote USD/ZAR with different spreads and may round pip values. Some charge commission on top. The rand value of a point varies between brokers and account types, so check the contract specification before you size a position.
The mistake people make here
The common mistake is treating a Fibonacci line as a signal to buy or sell. It is not. It is a price where other people may have placed orders, and that can change from one day to the next. Instead, wait for price to actually react at the line, then look for a second reason such as a candle pattern or a prior support level. If price passes straight through, the line did nothing and you move on.Check yourself
A USD/ZAR move runs from 18.0000 to 18.4100. What is the 61.8 per cent retracement level, and what is that distance worth on 0.10 lots?
Move size is 4,100 points. 61.8 per cent of 4,100 is 2,534 points. 18.4100 minus 2,534 points is 18.1566. On 0.10 lots at roughly R1 per point, 2,534 points is about R2,534.
If the same move is only 1,000 points, what is the 38.2 per cent level below the high of 18.4100?
38.2 per cent of 1,000 is 382 points. 18.4100 minus 382 points is 18.3718.